Budgeting Skills

A Management Tool

What is a budget?

A budget is a plan expressed in financial terms. It is about making estimates. So there must be flexibility in the budget. For example, if something should cost more than what you expect, your budget can handle it.

Budgets are also a way of providing a clear and objective look at the state of an organisation.

When creating a budget, follow the planning steps because this is a planning process.

How long does a budget last for?

A budget usually runs through a financial year (between 1 July in one year to 30 June in the following year).

What does a budget look like?

A budget will usually be presented in a financial report consisting of tables. Each table has columns (or rows) of numbers expressed in the currency of the country where your organisation operates. Then there should be one column (or one row) telling you in words what the amounts mean.

What type of budget have I got?

Line budget

A budget where you have amounts in one column showing how much you request for your budget and another column to show the increase or decrease due to things like inflation or automation systems.

Formula budget

A budget where what you get is based on a formula. This is a very common budget used in many organisations.

Zero-based budget

A budget where the claims made is based on a "starting from scratch" approach. It looks at exactly how much it costs right now to run certain services. It is not about looking at previous budgets and make projections. You have to take a hard look at your activities and their benefits, then you cost the activities you want to keep, and then you relate it to the funds available now. However, it results in producing huge amounts of paperwork to justify everything. Furthermore, it is painful for the people who could be made redundant one year and then reemployed the next.

Program budget

A budget similar to zero-based budgeting. The idea is to relate the goals of the organisation to programs and then to fund those programs. This financial report will look like a list of activities on the left side, and then across the page we have the names of programs that utilise the activities. Below these programs show the budget for each activity with total budget of each program shown at the bottom of each column. This has a strong planning focus. But it can be time-consuming.

Operating budget

A budget that shows the projected relationship between income and expenditure.

Materials budget

A budget showing the non-labour component of your budget (e.g. stationery and other consumables).

Capital budget

A budget showing the purchase of major items (e.g. assets like computers). For example, if you buy a rare book, then it is described as an asset. Ordinary books in a library should be treated as consumables in general.

What are the advantages and disadvantages of a budget?

Advantages

Some budgets can help an organisation to be (i) more efficient with their services or materials used to build a product; and (ii) warn of potential problems.

Disadvantages

Budgets tend to strengthen the traditional authoritarian style. For example, someone in higher management may say, "No you can't do that because there is no money available!". Because they control the purse, it can make you feel you are working in a hierarchical organisation.

NOTE: Perhaps we should say, "Yes, but this is the budget we have. Try to find another way to make your current funding achieve more for you or generate extra money somewhere to make it work the way you want it."

Understanding the terms used in a financial report

Consumables are minor items that are not accountable (e.g. a pen, a paper etc).

A cost centre is where the center spends money but does not make money from its spending.

A revenue centre is where the centre does make money. For example, overdue book fees, photocopying etc.

Replacement cost is the cost to reproduce and obtain a copy of the book.

Overheads are the costs to run an organisation on a daily basis. This includes administration like the cost of recruitment, power, rates etc.

What is audit?

An audit is an independent examination of the financial status of an organisation.

The purpose of an audit is to maximise the financial accountability of an organisation and to minimise the possibility of fraud. But you should remember, an audit does not eliminate fraud. It merely minimises it.

To eliminate it, you need the psychological approach which involves giving people adequate rewards and ensuring people are properly supported and have what they need to achieve things for themselves.

Tips for the manager when preparing a budget

If you (as a supervisor) receive a financial report, you need to ask and find out what it means. Don't try to file it away. Talk to your accounts people. Otherwise you will experience a "once-a-year" crisis.

In the preparation of a budget, it is common to ask for more than you need (known as the ambit claim). It is all about putting in enough flexibility into the budget. But remember, not all organisations will accept the ambit claim approach. So try to work out what other people do if you can!

Make sure you have the money to purchase something. Even if you think you are responsible to buy it, always ask the accounts people to make sure the money is there.

Performance relationship (i.e. good service) need not be related to budget. There is a psychological component of staff affecting performance.